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SpecialNeedsTrustRecoveryTBL-FACTSHEET-DOFFINAL Powered By Docstoc
					                   California Department of Health Care Services
                          Proposed Trailer Bill Legislation

                            Special Needs Trust Recovery

                                     FACT SHEET

Background on the topic (prior legislation, previous budget action, and related
The Third Party Liability and Recovery Division of the Department of Health Care
Services (DHCS) is responsible for recovery of Medi-Cal expenditures where a Medi-
Cal beneficiary has a claim against a liable third party.

Existing law authorizes courts to establish a special needs trust (SNT) for minors and
disabled individuals using the proceeds from a personal injury settlement, judgment, or
award. (See Prob. Code, § 3600 et seq.). SNT beneficiaries tend to be gravely
disabled and they often recover multi-million dollar settlements. During the existence of
these trusts, Medi-Cal, in many instances, continues to pay for the majority of the
beneficiary’s care. Trust assets are to be used only to meet the beneficiary’s special
needs, which are items and services that public benefit programs, such as Medi-Cal, do
not cover.

Federal law is clear that the trust corpus shall be considered an available resource for
purposes of Medicaid eligibility (42 U.S.C. §1396p(d)). However, Section
1396p(d)(4)(A) creates an exception to this rule by allowing a disabled individual under
age 65 to remain eligible for Medicaid benefits, despite having considerable resources
that would otherwise render the individual ineligible for such benefits. The
Congressional intent behind Section 1396p(d)(4)(A) is to permit continued Medicaid
eligibility as long as the state is reimbursed, upon the individual’s death and from any
remaining trust assets, for Medicaid expenditures made on behalf of the individual.

Existing law requires DHCS to seek recovery of Medi-Cal expenditures from the estates
of deceased Medi-Cal beneficiaries. Estate recovery (ER) is limited to services paid on
or after the beneficiary’s 55th birthday, unless the beneficiary was an inpatient in a
nursing facility prior to age 55. When the decedent is survived by a spouse, recovery is
deferred until after the spouse’s death. Recovery is altogether exempt when the
decedent is survived by a child under age 21, or a child of any age who is blind or
disabled according to federal law.

In Shewry v. Arnold (2004) 125 Cal.App.4th 186 (Arnold), the Department of Health
Services (DHS - now known as DHCS) asserted a claim for Medi-Cal reimbursement
against a decedent’s SNT. The Medi-Cal decedent’s disabled daughter invoked
Welfare and Institutions Code Section 14009.5, which governs ER, and argued that
DHS was barred from recovering against the SNT because she fell within the “surviving
disabled child” exemption of Section 14009.5. By focusing on the language in Probate
Code Section 3605(b) that provides that the trust property, upon trust termination, is
considered “part of the beneficiary’s estate,” the court saw no reason why SNT recovery
                                                   Special Needs Trust Recovery Fact Sheet – DOF FINAL
                                                                                             March 2010
should be treated any differently than ER. Consequently, the court agreed with the
daughter’s argument and denied DHS’s recovery.

Prior to Arnold, SNT recovery and ER were always treated differently, i.e., governed by
separate and distinct law. However, since the issuance of the Arnold decision,
attorneys have successfully defeated DHCS’s SNT claims by persuading superior
courts in California to extend Arnold to all of the ER exemptions listed in Section
14009.5. (Federal ER law also provides for these exemptions. See 42 U.S.C. §
1396p(b)). DHCS is currently losing approximately 90 percent of its SNT claims
because courts are applying ER law to SNT recovery. In fiscal year 2009-10, DHCS
estimates that this will result in lost revenue of approximately $3.5 million total funds.

Recently, attorneys have attempted to apply ER regulations to further defeat SNT
recovery. For example, ER excludes In-Home Supportive Services (IHSS) from its
claims. Attorneys are now challenging the inclusion of IHSS in SNT claims. The
majority of SNT claims include IHSS. If courts allow ER regulations to govern SNT
recovery, in addition to the ER statutory exemptions, there will continue to be a
significant loss of revenue to the state.

Because state law (Prob. Code, § 3605 – effective January 1, 1993) was enacted prior
to the federal statute (42 U.S.C. § 1396p(d)(4)(A) – effective October 1993), state law
does not follow federal law nearly as well as it could. Although neither statute contains
any provisions barring SNT recovery, the Arnold decision has caused California law to
conflict with federal law by allowing ER law and its claims exemption provisions to
govern SNT recovery. Since federal law mandates that the state be reimbursed at trust
termination from any remaining trust assets, failure to comply with federal law could
make DHCS, and the General Fund (GF), liable to the Centers for Medicare and
Medicaid Services (CMS) for lost reimbursement.

In 1997, the federal court in Dalzin v. Belshe (N.D. Cal. 1997) 993 F.Supp. 732 (Dalzin)
determined that the provisions of Section 14009.5(b)(3), regarding "proportionate share"
recovery, violated federal law. Prior to Dalzin, only the portion of an estate related to a
minor, blind, or permanently disabled heir was exempted by DHCS. The Dalzin
injunction exempted the entire estate regardless of other heirs’ exempt status. Although
DHCS has complied with the Dalzin order since its issuance in 1997, subdivision (b)(3)
of Section 14009.5 was never formally eliminated from the statute. In light of the
proposed amendments to state law to address the problem with SNTs, it is an
appropriate opportunity to also delete the invalid provisions of subdivision (b)(3).

Why is this change needed (i.e., what problem is the language trying to address)?
Attorneys are successfully invoking ER statutes and exemptions to circumvent Medi-Cal
recovery from SNTs. State and federal law authorize the creation of an SNT, but
federal law also explicitly requires that the state be reimbursed from all remaining trust
assets upon trust termination. Under current state law, when an SNT is terminated, the
trust property becomes part of the beneficiary’s estate. Following Arnold, California
courts have allowed, and are continuing to allow, ER statutes to govern SNT recovery,
and in those instances where an ER exemption is found to exist, SNT recovery has
                                                    Special Needs Trust Recovery Fact Sheet – DOF FINAL
                                                                                              March 2010
been completely defeated. The Arnold case has caused state law to conflict with the
mandate in federal law that the State be reimbursed at trust termination. In addition, per
Dalzin, state statutory provisions regarding proportionate share recovery were
determined to violate federal law. In both respects, this proposed legislation will
conform state law to federal law.

A legislative remedy is necessary to clarify that SNT recovery is not governed by ER
provisions, which will prevent future lost SNT recoveries. Legislation will also delete
invalid provisions of current law regarding proportionate share recovery.

Summary of arguments in support.
   Federal law mandates that the state be reimbursed at trust termination (from any
    remaining trust assets). Legislation is needed to bring state law into compliance
    with federal law regarding SNT recovery. A statutory change is the only solution
    to remove the conflict between state and federal law.
   Failure to comply with federal law could make DHCS, and the GF, liable to CMS
    for lost SNT recoveries.
   Arnold is based on existing language in Probate Code Section 3605(b). There
    are no other alternative solutions that will conform state law to federal law and
    prevent the application of ER exemptions, listed in Section 14009.5, to SNT
   Attorneys are applying ER statutory exemptions and regulations to SNT
    recovery. Statutory amendments are necessary to protect the state from lost
    recoveries and potential liabilities.
   No additional resources are needed to implement this legislation. An increase to
    the GF is expected once SNT recovery is restored.
   Current state law regarding proportionate share recoveries is invalid and
    inconsistent with DHCS practices that conform to federal law and the Dalzin

Potential for opposition, if yes, why.
Unknown. This trailer bill language was proposed last year. At that time, DHCS met with
advocate groups, who did not express either support or strong opposition; however,
they acknowledged DHCS's concerns with the Arnold decision, and expressed interest
in reviewing the proposed language when released. The California Advocates for
Nursing Home Reform (CANHR) voiced concerns with portions of the proposal and
suggested that the issue be addressed in a policy bill. CANHR requested that, in
accordance with Dalzin, DHCS eliminate subdivision (b)(3) of Section 14009.5
regarding proportionate share recovery. DHCS has included deletion of subdivision
(b)(3) as part of this proposal. Other requested modifications exceeded DHCS’s original

Attorneys representing estate heirs will likely oppose this proposal. In the absence of
statue that resolves the problem of courts’ application of Arnold in recovery from SNTs,
attorneys will continue to benefit from successfully defeating DHCS’s recovery claims.

                                                    Special Needs Trust Recovery Fact Sheet – DOF FINAL
                                                                                              March 2010
Is there a BCP associated with this language (yes or no)?

                                              Special Needs Trust Recovery Fact Sheet – DOF FINAL
                                                                                        March 2010

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